Indoco Remedies - Good prospects... - IDBI Capital

Indoco Remedies (Indoco's) growth out-performance during 9MFY13 in the domestic business despite an acute heavy portfolio and legacy brands inspires confidence on the strength of the franchise. Supplies of high margin ophthalmic products to US through a partner and other partnerships in the non-regulated markets and API space gives us comfort on the scale of operations going forward. The beginning of supplies to its US partner will be a key event. We do not have a rating on the stock.

Domestic business: Acute therapy out-performance; gradual increase in productivity Indoco's domestic business has witnessed healthy growth on a sustained basis since Q1FY12 despite the company having a acute:chronic mix (90:10). Indoco expects the acute:chronic mix to change to 80:20 over the next two years. Increase in MR productivity will be gradual on back of higher pricing of products in the CVS space. Indoco's carving of cardio and diabeto (CND) products into a new CND division which includes sartan, statins and glyclazide with 245 MR's is a step in the right direction. Growth in the lifestyle segment has been upwards of 20% over the last 2 quarters while its anti-infectives and GI portfolio continue to outperform the market growth. The domestic business size at Rs3.4 bn/Rs3.0 bn in FY12/9MFY13 is expected to grow at 15% CAGR over the next two years.

International business: Opthal product launches in US address US$800 mn market Indoco is expected to launch 3 products with cumulative market size of US$800 mn in FY14 in partnership with large US generic company. We believe the strength of Indoco's partner in gaining market share coupled with low competition can present a substantial upside as the company has a profit sharing model in the same. In EU, the company has also partnered for supplies to AOK and has been shifting from a pure contract manufacturing model.

Partnership's to add scale; Improving operating performance

Key partnerships in the semi-regulated markets with Aspen and tie-up with DSM for API supplies may not be margin accretive for the company but will add scale to its operations. EBITDA margin improvement from 13.7% in FY10 to 14.2% in FY12 is mainly due to high growth in the domestic business. The company believes with high margin supplies to US partner along with continued momentum in the domestic business, the EBITDA margin will improve going ahead.

Outlook and Valuation

At CMP of Rs65, the stock trades at 11.4x FY13E consensus EPS of Rs5.7 and 8x FY14E consensus EPS of Rs8. Indoco looks set for promising growth prospects over the next couple of years led by strength in domestic business and likely trigger from its US launches. We currently do not have a rating on the stock.

Source : Equity Bulls

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